BofA Analysts: 'Gangbusters' Jobs Report Could Push Fed Toward Rate Hike If Inflation Stays Above 3%

The Federal Reserve might be gearing up for a surprising move. Bank of America analysts say the next rate decision could actually be a hike – not a cut. It all comes down to inflation and a shockingly strong December jobs report.

Let's break it down.

The Jobs Report That Got Everyone Talking

The U.S. economy added 256,000 jobs in December, blowing past expectations of 164,000. Bank of America called the report "gangbusters" in a note last week, as reported by Business Insider. "Economic activity is robust. We see little reason for additional easing," wrote Aditya Bhave, who led the analysis.

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With unemployment low and the economy buzzing, the Fed seems out of the rate-cutting game for now. Instead, analysts say, the focus will shift to tackling inflation.

What Could Trigger a Hike?

Inflation is the big question mark. The Fed is monitoring core personal consumption expenditures (PCE), its go-to inflation gauge.

Core PCE excludes volatile items like food and energy. If it stays above 3%, BofA says a rate hike could be back on the table. November's numbers showed core PCE rising 2.4% year-over-year. That's above the Fed's 2% target but hasn't yet crossed the 3% threshold.

Another red flag? If long-term inflation expectations "become unanchored," a hike could happen. If people start assuming inflation will stick around, the Fed might act to keep things in check.

"The bar is high," BofA wrote, "but hikes will likely be in play if y/y core PCE inflation exceeds 3% and/or long-term inflation expectations become unanchored."

See Also: How do billionaires pay less in income tax than you? Tax deferring is their number one strategy.

What Are Traders Thinking?

The CME FedWatch tool shows traders are betting big on a rate hold in January, with a 97% chance of no change. But looking ahead, the picture gets fuzzier.

From now through December, traders are split. Some expect one or two rate cuts, but a growing number – 26%, up from 13% last week – think the Fed could hold steady all year.

Why It Matters

This debate is a big deal for investors, businesses and consumers. Rate hikes could cool the economy, making borrowing more expensive. But staying put could risk inflation sticking around longer than anyone wants.

For now, all eyes are on inflation. If core PCE inches above 3%, as BofA warned, don't be shocked if the Fed ditches its rate-cutting playbook and hits the brakes instead.

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